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Danone’s Growth Goals Set Back Six Months After Recalls in Asia

October 16, 2013

After recalling some products supplied by Fonterra due to a warning of tainted ingredients, the world’s biggest yogurt maker saw its slowest quarterly sales growth since 2009.

Julie Cruz

Danone, the world’s biggest yogurt maker, said a product-safety scare in Asia has set the company back by six months in its efforts to restore "strong sustainable, profitable growth."

Sales of baby-nutrition products slumped in the third quarter after Danone recalled some products supplied by Fonterra Cooperative Ltd. due to a warning of tainted ingredients. That led to the slowest quarterly sales growth since 2009 and prompted the company to cut its full-year forecasts today.

"The Fonterra story has impacted us by six months in terms of delay in reaching what we wanted to do," Chief Financial Officer Pierre-Andre Terrisse said today on a conference call.

Danone fell as much as 5.2 percent in Paris trading, the most in about a year, as the company followed Unilever and Nestle SA in reporting slowing revenue. Growth in many emerging markets is weakening and the Activia maker has also been weighed down by bribery claims at its Dumex baby-milk business in China, where it has been fined for fixing prices of infant formula.

"While we expected that Danone would warn before February, we didn’t expect it now," Jeff Stent, an analyst at Exane BNP Paribas, said in an e-mailed statement. "But I guess better to get real sooner rather than later."

Baby-nutrition sales, representing about 20 percent of revenue, fell 8.6 percent on a like-for-like basis in the third quarter, hurt by the recall of infant formula in eight markets that subsequently proved to be a false alarm.

Danone is claiming at least 200 million euros ($272 million) in compensation from Fonterra, though the New Zealand company has said it "strongly denies" any legal liability.

Brand Positioning

Baby-food sales in September were 40 percent of the July level in the markets affected by the product recalls, Terisse said on the call. Danone’s priorities are to diminish high levels of inventory, reassure consumers and improve the company’s brand positioning, he said. Inventory levels will stabilize toward the end of the year, the CFO said.

Terisse said the recalls reduced sales growth by 3.2 percentage points in the third quarter and will have an impact of about 3 percentage points in final three months of 2013. The effect for the year will be about 1.5 percentage points.

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